After Fed Chair Powell hinted that interest rate cuts are imminent, traders have become considerably more relaxed. However, the market's next big test will be the core driver behind the stock market's rise over the past few years: the AI frenzy.
Before last Friday, market sentiment was low, with the S&P 500 index falling for five consecutive days, its longest losing streak since January. Wall Street's earlier bets on imminent Fed rate cuts had cooled. But Powell's remarks dispelled these concerns, leading the S&P 500 to surge in a single day, marking its best performance since May and coming within less than 2 points of its all-time high.
Next up is Nvidia. The company will release its quarterly earnings report after the US market closes on Wednesday. Traders hope this report card will ease market worries about AI spending and confirm that the recent stock market rebound is not just another tech bubble.
Eric Beiley, Executive Director of Wealth Management at Steward Partners, said: "Nvidia is crucial to the stock market because any sign of further strength becomes fuel to ignite the market. The real risk is that all AI investment may have peaked. If its performance falls short of expectations and its outlook is cautious, it will shake the market."
Nvidia's size and status make it a "bellwether" for the market. Its weight in the S&P 500 index is nearly 8%, and it sits at the core of AI development. Its chips are almost ubiquitous, with about 40% of its revenue coming from Meta, Microsoft, Alphabet, and Amazon—all of which are also among the top ten weighted companies in the S&P 500 index.
Therefore, Nvidia's quarterly earnings report and outlook have become a key event for the entire market.
Kim Forrest, Chief Investment Officer at Bokeh Capital, said: "The pressure is still on. A large part of the market's gains over the past few years has relied on Nvidia and its partners, which makes me a bit nervous."
Although rate cuts are beneficial for growth stocks like Nvidia, they cannot eliminate concerns about high market valuations. The S&P 500 index's current forward P/E ratio is about 22 times, higher than its 10-year average of 19 times; Nvidia's blended forward P/E ratio is about 34 times, lower than its 5-year average of 39 times.
Nevertheless, Wall Street analysts remain broadly optimistic. In just the past week, at least nine analysts covering the company have raised their target prices. The current average target price is over $194, higher than last Friday's closing price of $178, implying an upside potential of about 9%.
